Have you ever wondered why people talk about investing early in your life? The simple reason is the power of compound interest. If you start investing early in your life you will realize the power of compound interest and will greatly speed up your path to FI. This is an incredible way to build wealth at a young age.
Want to see what the power of compounding can do? You can see a simplified compound interest calculator here, you can input a few numbers to see what the power of compound interest looks like.
Let’s take the below example over a 30 year timespan:
- You started with an investment of $500
- You add $100 to this investment every month
- Let’s assume this investment earns you a 7% return
What Does Compound Interest Look LikeIn the above example, here is what your money would look like after 30 years!
What are we looking at? The y-axis indicates the dollar value. The x-axis indicates the number of years. The blue/green line shows the amount you contributed over time and the red line shows the future value of the money after compounding.
Here is what I find most interesting about compound interest. Early on in the investment, you won’t see much difference between the red and blue/green lines. For example, in the graph above, you don’t see much difference in the two lines until year 14. This would make most believe the strategy isn’t working. Some would quit. Some would think they wasted a bunch of time. But wait, there is more.
It is the later years where you begin to truly see the separation. Beginning around year 14 we begin to see exponential growth take place. Growth compounded on more growth will only speed up this curve faster as you look further out.
Don’t believe me, let’s look at what a 50 year time horizon would look like:
But What If I Didn’t Start Early?
This is a very common question I get. Many believe if they don’t start early then they should not start at all. This is part of the challenge of having a Fixed vs Growth mindset. If you want to read more about what the difference of theses mindsets, click here.
Don’t let the fact that you didn’t start young stop you from starting! You learn new information every day. Take the new information you learn each day and figure out how to apply what is relevant. Investing in your future self and the ability to become financially independent will always be relevant.
- The power of compound interest is real. Be patient and start early!
- If you haven’t started yet and you aren’t young, SO WHAT! Start now. Don’t let this be the excuse to never get started.
- The longer you look out on a compound interest timeline, the more compounding you see. This is true for any scenario you plug into the calculator.
As always, don’t forget the first core principle: Your money should make money for you.
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